HSA

On Aug 20, 11:15 am, "Gil Faver"

The general tax rule is "accelerate deductions, defer income" - which appplies to a concept of money that depreciates with time. When applied to HSAs, that suggests spending tax-deducted HSA dollars when you need to.

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Somebody enrolled in Medicare cannot contribute to an HSA, according to IRS publication 969 (2007), page 3.

Once enrolled, I stopped contributing, but am using up the amount that had accumulated already.

OTOH, there's something new in publication 969 called a "Medicare Advantage MSA." There don't seem to be any offered yet where I live, and nobody I've contacted seems to know about it. It might fit your need if you can find out anything about it.

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both money in an HSA and money not in an HSA "depreciates with time". Doesn't the money in an HSA depreciate at a lower rate than money not in an HSA?

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This might make sense, but spending the HSA money does not result in tax deductions. I tend to look at an HSA as another tax-advantaged savings vehicle, so I would think that spending money out of pocket and keeping the HSA intact would be beneficial.

Having said that, I have an HSA available to me and I opted for a PPO as it appeared to be the better choice. In addition, this particular HSA has crappy investment options and high expenses meaning that depleting the assets in the account as medical expenses come up might make more sense anyway.

-Will

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I don't think spending HSA dollars leads either to a tax deduction or deferred income, does it? Adding to the account does, but taking out does not. If you have enough medical expenses for them to be deductible, would spending from an HSA increase your taxes? Or do you get to double-dip?

-Will

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The lack of financial "education" probably made me mix my words/

Money is deposited into HSA pre-tax (like a 401k) Money is withdrawn from HSA pre-tax (like a Roth).

My thought is to avoid taxes on as much of my income and spending now as possible.

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I could see an argument for leaving dollars in an HSA for someone nearing retirement, whose retirement assets were far behind. It's another tax-advantaged place to accumulate wealth, after you've maxed out 401ks, IRAs, etc. A forever-unused HSA eventually becomes, in effect, a traditional IRA in terms of its tax rules. You can withdraw the money for non-medical purposes, paying tax but no penalty on the distribution.

And if the medical expenses are so high that they're deductible, that could be another scenario where you pay with after-tax money. Rarely happens though.

Absent that...well you're missing out on a benefit of the HSA, which is paying bills using before-tax dollars. In exchange you're able to leave money invested tax-deferred, but on balance I think "immediate benefit" wins out on this one. The medical expense is certain, the future earnings in the account (relative to inflation, especially) is uncertain. There's already more "contribution capacity" in tax-deferred accounts than most people make use of. And if you aren't maxing out your

I also think of HSA funds as slower-growth than the typical long-term tax-deferred dollar, because of account fees, somewhat limited investment alternatives, and here in CA, the lack of a state tax benefit (CA still doesn't recognize HSAs, only MSAs). Plus, even if you go with one of the companies with decent investment alternatives, until the account is really large, it's a good idea to invest it relatively conservatively in case you need to draw it all down over a couple-few years. Conservatively may mean "money treading water vs. inflation" -- another argument for spending it now from the account.

-Tad

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And because you have current large medical expenses which you will enter on Schedule A, you will be getting another tax deduction this year, in addition to the HSA contribution. Is that the trend of your thinking?

Elizabeth Richardson

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What makes you think I can deduct on schedule A? The medical bills thus far for kids have been mostly covered by insurance. How much expense would need to be out of pocket to put on schedule A?

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I was thinking you were looking to get both the deduction for the contribution to HSA and deduction for expense. How else would you be getting a tax benefit for the expense?

Elizabeth Richardson

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But a retiree is likely to have medical expenses also, no? So the money in the HSA would still potentially be completely tax exempt.

-Will

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I was thinking HSA withdraws are tax free- so that is a tax benefit.

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I've had an HSA for 2 years and I'm maxing it out, and maxing out my

Needless to say, there's not much money left over at the end of the month to pay medical bills, and my wife is running up pretty big medical bills each month so I put them on a credit card (paying the full balance gets me a 10% discount from the clinic, and running it thru the CC gets me rewards dollars back and easy to track statements.) Then I pay the CC off when it comes due, and when money gets tight I write myself a check from the HSA for a prior month's medical bills and put a copy of that month's CC statement in my medical expenses file. It's not as complicated as it sounds. If the medical bill does not cause things to get tight, I just pay it from general funds.

The goal is to have the HSA grow over time to build up a medical slush fund (like I think it's supposed to be) but it's growing awfully slowly right now because of the drawdown.

If I ever accumulate a healthy balance in the HSA, I will start paying

*I think that's the number.

Bob

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The reason there's such a wide discussion is that different people look at an HSA in different ways.

Personally, I think of it as a way to get around the 7.5% threshold for deducting medical expenses on Schedule A every year. With an HSA, I (in effect) get to deduct medical expenses from the first dollar every year.

Now if only California would conform with the federal policy!

Editorial: If Congress had wanted to do things right, it would not have invented HSAs. Instead, they would have eliminated the 7.5% threshold for anybody having a high-deductible health plan. That would have accomplished the same objectives with far less bureaucratic rigmarole (IMO).

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The expense is certain and must be paid for now. The question is thus which pocket does the payment come from - taxable account or HSA account? The question assumes, and the OP implied, that one isn't going to spend the other pocket's money elsewhere, for now. See more below.

More than potentially. My understanding is that so long as you have medical expenses after opening the HSA _and_ you don't use the expenses for tax deductions, then you can withdraw from the HSA tax free up to the amount of accumulated medical expenses at any time.

It doesn't seem to matter if you have the expenses in 2008 and withdraw the HSA money in 2025, using the 2008 expenses to offset the HSA withdrawal. Yes, it sounds weird, but so far, I haven't found anything that contradicts this.

See, e.g.

Then, in 2025 (or whenever), you have (1) $100 + growth in a taxable account, subject to taxes; or (2) $100 + growth in a nontaxable account, probably tax-free. (Your expenses through 2025 or whenever will have to match not only the original $100, but the growth of that investment.)

Mark Freeland snipped-for-privacy@nyc.rr.com

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Not to argue Congressional intent, but had they done it that way, you'd be deducting those expenses on your federal income taxes, but your employer and you would still both be paying social-security taxes on it. Your employer wouldn't have any incentive to contribute, and you'd have less cash to use for it, too (unless you are one of the top few percent of earners). Moreover, the accrual/growth features - it's a tax-free/tax-deferred account - add huge value if you don't use up all you've saved in the early years. Healthy young folks with low medical expenses can end up with huge balances later on to use for future (likely higher) medical expenses and if they never use them for medical expenses, eventually the money can come out of it like an IRA - pay taxes but no penalty after 65. (and, again, never have paid any SS taxes on it in the first place).

HSAs, for those with low current medical expenses, are a huge win.

Or a single, fairly high ceiling, generalized "tax-incentive-savings plan". Now there are several different kinds of retirement savings plans, college savings plans, and health plans. I must have about ten of these myslef and big families have even more. Lots of paperwork for both taxpayers, companies and the government.

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I wouldn't even consider doing that! I think it's best to match the withdrawal to the right tax year even if you can read ambiguities into the law allowing late reimbursements. Plus, I expect these issues to get tightened up in the future, perhaps very soon. Have you followed the HSA substantiation bill? It's already creeping in - HSA Bank now requires a different process/form for reimbursements vs. expenses paid directly by check/debit.

Will - you're right, there is that argument of rolling it forward to pay larger medical expenses in the distant future. One might believe that these costs are going to be so much higher that tax-deferred growth of the money is more important than getting reimbursed now. And, you have enough excess cash to cover not only all the other spending/saving needs in life, but also these medical expenses you could be paying from the HSA. I think that's an unusual individual though.

On a more practical level, I do some mental accounting...health insurance plus HSA is the "medical expense" budget for the year. Some (or all) of the HSA rolls forward in a "healthy" year, but that's good, it will help in a more costly one. But at a certain point, it's enough. Even the HDHPs have out of pocket maximums that aren't all that high, and with family coverage you can add another $5800/year, going up annually. So you start thinking about questions like "what if I die before using that up?" or "do I have too much spooling up in tax-deferred accounts?" or "isn't it likely the health insurance scheme will change substantially by the time I retire?" There's a bird-in-hand aspect to just writing that check now, and a risk of "hoarding" for a day that never comes.

-Tad

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